Evidence:
any information used by an auditor to determine whether the information being audited is stated
in accordance with the established criteria
Auditors must determine the appropriate type and quantity of evidence. They answer 4 questions:
1. Audit procedure?
2. Sample size?
3. Items to select?
4. When to perform? -SEC requires audited financial statements for public
companies in 60-90 days
Type Of Evidence: Observation
1. Audit procedure? Observe client's counting inventory to determine whether they
are properly following instructions
2. Sample size? All count teams
3. Items to select? N/A
4. When to perform? B/S Date
Type Of Evidence: Physical Examination
1. Audit procedure? Count a sample of inventory & compare qty & description to
client's counts
2. Sample size? 120 items
3. Items to select? 40 items w/ large $ value, + 80 randomly selected
4. When to perform? B/S Date
Type Of Evidence: Inspection
1. Audit procedure? Compare qty on client's perpetual records to qty on client's
counts
2. Sample size? 70 items
3. Items to select? 30 items w/ large $ value, + 40 randomly selected
4. When to perform? B/S Date
Audit procedure: the detailed instruction that explains the audit evidence to be
obtained during the audit
Audit program the list of audit procedures for an audit area or an entire audit Often includes:
- Sample size
- Items to select
- Timing
Two determinants of persuasiveness (both must be met):
- Appropriateness (Relevant, Reliable)
- Sufficiency
Evidence is Appropriate if it is:
- Relevant: pertains to audit objective being tested
- Reliable: believable and worthy of trust
Six Characteristics of Reliable Evidence:
- Independence of provider
- Effectiveness of client's internal controls
- Auditor's direct knowledge
- Qualifications of individuals providing the information Degree of objectivity
- Timeliness
Two main determinants of sample size:
- Auditor's expectation of misstatement
- Auditor's evaluation of internal control
What is another factor of sample size?
COST Ultimately an auditor is looking for a sufficient amount of appropriate evidence at the
lowest possible cost
Eight types of evidence answers for evidence questions
Physical examination
Confirmation
Inspection
Analytical Procedures
Inquires of the Client
Recalculation
Reperformance
Observation
Physical Examination
- Is the inspection or count by the auditor of a tangible asset.
- Most often associated with inventory or cash.
- Also applies to the verification of securities, notes receivable, and tangible fixed assets.
Confirmation
- The receipt of a direct written response from a third party verifying the accuracy of
information that was requested by the auditor.
- When practical and reasonable, U.S. auditing standards require the confirmation of a
sample of accounts receivable.
- To be reliable, must be controlled by auditor from time prepared until returned.
Inspection
- The auditor's examination of the client's documents and records to substantiate the
information that is, or should be, included in the financial statements.
- Internal documents (need good internal control)
- External documents - may be better
Two ways of gathering External Documents
Vouching - when auditors use documentation to support recorded transaction.
Tracing - if the auditor traces from one report to another to satisfy the "completeness"
objective
Analytical Procedures:-evaluations of financial information through analysis of plausible
relationships among financial and nonfinancial data
Analytical procedures are required during the planning and completion phases on all audits
Purposes of analytical procedures:
- Understand the client's industry and business
- Assess the entity's ability to continue as a going concern
- Indicate the presence of possible misstatements (unusual fluctuations)
- Reduce detailed audit tests
Inquiry :- the obtaining of written or oral information from the client in response to questions
from the auditor
Inquiry often requires
corroborating evidence
Corroborating evidence
additional evidence to support the original evidence
Recalculation:- rechecking a sample of calculations (often done by computer-assisted software)
Reperformance
independent tests of client accounting procedures or controls that were originally done as a
part of an entity's accounting and internal control system
Observation
- Consists of looking at a process or procedure being performed by others (watching)
- Requires corroborative evidence
Some conclusions about evidence:
A. Internal control has a significant influence on the reliability of most kinds of evidence
B. Two different types of evidence can be equally reliable
C. A specific type of evidence is rarely sufficient by itself
The two most expensive types:
Physical examination
Confirmation
The three least expensive:
- Observation
- Inquiries of the client
- Recalculation
Terms - Evidence:
A reasonably detailed study of a document or record to determine specific facts about it.
Type of Evidence: Inspection
Terms - Scan:
A less-detailed exam of document or record to determine whether there is something unusual
warranting further investigation.
Type of Evidence: Analytical Procedures
Terms - Read:
An exam of written info to determine facts pertinent to the audit.
Type of Evidence: Inspection
Terms - Compute:
A calculation done by the auditor independent of the client.
Type of Evidence: Analytical Procedures
Terms - Recompute:
Calculation done to determine whether a client's calculation is correct.
Type of Evidence: Recalculation
Terms - Foot:
Addition of column of #s to determine whether the ttl is the same as the client's
Type of Evidence: Recalculation
Terms - Trace:
Instruction normally associated with inspection or reperformance. Instruction should state what
the auditor is tracing and where it is being traced from and to. Often, audit procedure that
includes the term trace will also include a second instruction, such as compare or recalculate.
Type of Evidence: Inspection / Reperformance
Terms - Compare:
Comparison of info in 2 different locations. The instruction should state which info is being
compared in as much detail as practical.
Type of Evidence: Inspection
Terms - Count:
Determination of assets on hand @ a given time. This term should be associated with only
with the type of evidence physical examination.
Type of Evidence: Physical Examination
Terms - Observe:
Act of observation should be associated with observation.
Type of Evidence: Observation
Terms - Inquire:
Act of inquiry should be associated with inquiry.
Type of Evidence: Inquiries of client
Terms - Vouch:
Use of documents to verify recorded transactions or amounts.
Type of Evidence: Inspection
Audit Documentation
- The record of audit procedures performed, relevant audit evidence, and conclusions the auditor
reached.
- Often referred to as working papers or work papers. (Complete within 60 days after audit report
release date)
Record retention period:
Five year for non-public companies
Seven years for public companies
Should document any changes after the file completion date (Read case page 189)
...
The overall objective of audit documentation is to aid the auditor in providing reasonable
assurance that an adequate audit was performed in accordance with auditing standards
Audit documentation provides:
- A basis for planning the audit
- A record of the evidence accumulated and the results of the tests
- Data for determining the proper type of audit report
- A basis for review by supervisors and partners
Who "owns" audit files?
- They are the property of the auditor.
- The only time another party, including the client, has the right to see them is when
subpoenaed.
Rule 301 Code of Professional Conduct a member shall not disclose any confidential information
obtained in the course of a professional engagement except with the consent of the client
SEC requires the following documentation:
- Working papers
- Memos
- Correspondence
- Communications
- Other documents and records
- Electronic records
Permanent Files contain data of a historical or continuing nature pertinent to the current audit
file.
Permanent Files Typically include:
- Articles of incorporation
- Bylaws
- Bond indentures
- Contracts
- Analyses from previous years of accounts
- Information related to assessing internal control and assessing control risk
- Results of analytical procedures from previous year's audits
Current Files includes all documentation applicable to the year under audit
Current Files Often include:
- Audit program (auditing standards require written audit program)
- General information
- Working trial balance, Lead Schedule - the detailed accounts from the general
ledger making up the line item
- Adjusting and reclassification entries
- Supporting schedules
